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By John Helmer, Moscow

Tethered high above Victor Pinchuk’s newest steel smelter at the Interpipe plant, visible for miles around the eastern Ukrainian city of Dnepropetrovsk, is a large balloon. It’s meant to symbolize what the Interpipe website is calling the smelter’s state-of-the-art technology — “the construction plant has no harmful effect on the atmosphere or social surroundings”; also its historical uniqueness in the steel industry west of the Russian border – “a vital step in the development of the domestic Ukrainian pipe industry.” For the curious and for asthmatics, Interpipe is offering guided tours of the plant to demonstrate how it “marks the beginning of a green era in the metallurgical industry.” The plant’s press office says the balloon construction is called Sun Interpipe. “It’s an art object, and we are not going to remove it.”

Less intentionally, the balloon symbolizes the sky-high cost of building the smelter and supplying it with electricity; Pinchuk’s growing billion-dollar debts; and the collapse of demand for the steel products Pinchuk is offering for sale in Ukraine and Russia, Interpipe’s make-or-break markets.

Although Interpipe remains privately held by Pinchuk, documents the company has prepared with his bankers to cover his debts, together with bank sources, reveal how strapped for cash Pinchuk is. The balloon is also going up for Pinchuk, as he tries to raise at least $143 million, perhaps ten times as much, from a claim filed in the UK High Court against two rival Ukrainian metals magnates, based on recollections of meetings Pinchuk and the others held in the Ukraine, Israel, Sardinia, and Switzerland, starting nine years ago.

An unusual internet release by Pinchuk’s investment unit, EastOne, provides a four and a half-minute interview with Pinchuk’s lawyer, Oleg Mubarakshin, and a one-page text summarizing the London claim. This was filed, the text says, on March 12, 2013. A coordinated release of the material produced a spate of near-identical newspaper reports in the Ukraine, three in Russia, and one in London.

According to the claim summary, in 2004, when Leonid Kuchma was President of Ukraine, an iron-ore mining company called Krivorozhskiy Zhelezorudnyy Kombinat (KZhRK) was privatized for $130 million. Pinchuk was Kuchma’s son-in-law. He claims that Gennady Bogolyubov and Igor Kolomoisky, two rival steelmakers and partners in the Privat banking group, agreed “through a qualifying entity” to bid and buy the asset from the government. They then, allegedly, “undertook to transfer KZhRK to Mr Pinchuk upon being reimbursed the purchase price of $130 million plus a 10% ($13m) commission. Mr Pinchuk duly paid the full US$143 million but the asset was not transferred to him.”

Pinchuk says he took operational control of the mine. But in March of 2005 he was ousted by “persons believed to have been acting on the instructions of the defendants [who] forcibly entered the premises of KZhRK and took control of the plant.” Another eighteen months elapsed, and then on September 4, 2006, the trio allegedly met together. What happened next is the core of Pinchuk’s lawsuit: Bogolyubov and Kolomoisky, according to Pinchuk, “declared a trust in respect of KZhRK in favour of Mr Pinchuk, and gave him various undertakings regarding its transfer. In breach of trust and contract, Mr Bogolyubov and Mr Kolomoisky have failed to transfer KZhRK to its rightful owner, Mr Pinchuk, and it appears that they may have sold approximately 50% of KZhRK to a third party in 2007.”

Rinat Akhmetov, another Ukrainian metals magnate and owner of four steelmills, is identified by Pinchuk as the buyer of that stake in KZhRK. Pinchuk is also claiming that Akhmetov is a witness to the deal-making he undertook with Bogolyubov and Kolomoisky.

Mubarakshin — a Moscow-trained lawyer who worked for the beer group Inbev before joining Pinchuk — identifies in his video clip “repeated promises”, and a great deal of talking. “For years and years”, Mubarakshin said, “we tried over and over again, but every attempt at reaching agreement failed [because] Mr Bogolyubov and Mr Kolomoisky didn’t do what they said they would do.”

White & Case are the solicitors for Pinchuk, led by David Goldberg, a Russia case specialist. The barrister is Antony Grabiner QC, appointed a baron in 1999. Recently, Grabiner has been engaged to defend Rupert Murdoch’s News Limited against charges of illegal hacking and bribery of police.

Mubarakshin was asked to identify the place where the Ukrainians met in September 2006 for the meeting on which Pinchuk’s contract and trust claims depend. He and the court papers confirm it was Geneva. According to the 23-page Particulars of Claim, filed by Pinchuk’s lawyers, what was said in Geneva was “an oral agreement…in part evidenced in writing”. There was also a handshake. But the Pinchuk group declines through its spokesman at Maitland, a London public relations firm, to make available a copy of signed documents of contract or trust which Pinchuk is alleging to have been breached.

Pinchuk’s lawyers also reveal that Bogolyubov wasn’t at the Geneva meeting, so there is no evidence that he shook hands or participated in what was said. See Section 31, page 11 of the Particulars of Claim here.

Briefed independently, the Financial Times (FT) cites Pinchuk himself as conceding the evidence for his claim “was mainly made verbally.” The FT also cautioned that “the risk of a dispute centered on verbal agreements was laid bare in the case of [Boris] Berezovsky.” The FT report conveys doubt “if the case reaches trial”.

The itemization in the court papers of the meetings Pinchuk believes will substantiate his $143 million deal refers to “oral agreement”, the terms of which allegedly depend on the recollection of witnesses. These include the principals, their employees, go-betweens, and in one meeting, an Israeli rabbi named Shmuel Kaminetskiy.

Bogolyubov is not commenting, and neither is his law firm Freshfields.

Independent sources believe there was a meeting in Geneva between Pinchuk and Kolomoisky. But they say there is documented evidence that it was impossible for there to have been any trust, let alone a shareholding contract, between them at the time. The sources identify a substantial claim filed in US federal court in Boston by Kolomoisky in March of 2006, charging Pinchuk with fraud, money laundering, and racketeering in relation to another Ukrainian asset, the Nikopol Ferro-Alloy Plant. In that case, Pinchuk, an American cousin of his, and a second American, along with Interpipe and associated trading companies, were accused of an elaborate asset and trading scheme, which depended in the first instance on Pinchuk’s closeness through his wife, Elena Kuchma, to the Ukrainian president.

“In 2002,” one of the court submissions alleges, “ Pinchuk, as President Kuchma’s future son-in-law, was able to exercise effective control of Nikopol. Using his family connections, Pinchuk caused Nikopol to enter into a series of self-dealing contracts clearly designed to siphon hundreds of millions of dollars of Nikopol’s profits annually to entities controlled and/or beneficially owned by Pinchuk, Margulis, and/or Novack. These contracts caused Nikopol to (a) purchase raw materials (ore) at above market prices from entities related to Pinchuk, Margulis, and Novack and sell the finished product at below market prices to entities also controlled by Pinchuk, Margulis, and Novack; and (b) enter into unnecessary, profit-skimming tolling contracts, whereby Nikopol was paid a fee for processing ore, while other companies controlled by Pinchuk, Margulis, and Novack reaped the profits associated with selling the finished product on the open market.”

The illegal scheme, alleges the Boston court claim, dated March 30, 2006, involved “racketeering activity, including wire fraud, and, upon information and belief, acts of bribery (in violation of the Foreign Corrupt Practices Act), money laundering, foreign travel in aid of racketeering, and illegal monetary transactions.”

Pinchuk himself was charged with having “used Kuchma’s influence to extort Ukrainian officials and secure their cooperation and assistance in carrying out the schemes.” Privatization of Nikopol in Pinchuk’s favour, according to a source cited in the US court documents, resulted in Pinchuk paying $80 million for an asset reportedly worth $1 billion. Details of allegedly fraudulent trading schemes are provided in the dossier; these continued through 2004 and 2005, and followed the victorious presidential election campaign by Victor Yushchenko, who took power early in 2005.

Loss to Nikopol of several hundred million dollars, plus treble damages under the US racketeering statute, were sought. The case was settled out of court, however, and the lawyers involved say they cannot comment. The new Pinchuk filing in the High Court reveals that the confidential settlement between Kolomoisky and Pinchuk occurred on November 22, 2006.

In Pinchuk’s London filing, he claims the Boston case was directly connected to the KZhRK deal. “The Defendants [Bogolyubov and Kolomoisky] sought to impose pressure on the Claimant [Pinchuk] to agree to their proposals by procuring the institution on 30 March 2006 of proceedings by certain of their companies (namely Athina, Varkedge and Wisewood) against the Claimant in Massachusetts, USA, in which spurious allegations and claims were advanced under the Racketeer Influenced and Corrupt Organisations Act.”

Why in parallel, between 2004 and the meeting on September 2006, Kolomoisky and Bogolyubov would, as Pinchuk charges, trust him with shares to the KZhRK remains to be clarified. Pinchuk is now alleging that the others broke the Nikopol settlement agreement, accusing them of having “acted in breach of the Claimant’s rights under the Constitution and the Beneficiaries Agreement in relation to the Ferroalloy Holding.” This claim, which has not been litigated before, is excluded from the ZhRK claim.

Mubarakshin was asked why Pinchuk didn’t buy the shares himself from the government. He responded through a spokesman that Ukrainian privatization rules at the time required that bidders for KZhRK had to qualify to buy the asset by holding at least 25% in the group from which KZhRK was being sold. Pinchuk didn’t qualify; he claims Bogolyubov and Kolomoisky did.

The record of meetings which followed over the next nine years names 15 witnesses.

By attacking the record of the US court case, and opening up its confidential terms, Pinchuk is putting his credibility in the US to an unusual test. That credibility is also exposed to scrutiny in records filed at the Foreign Agents Registration Act (FARA) bureau of the US Department of justice. These reveal that Pinchuk is currently paying an American lobbyist $40,000 per month to arrange meetings for him with high US officials, such as Hillary Clinton when she was Secretary of State. Clinton appears to have refused an attempt Pinchuk financed last year to promote a Ukrainian election endorsement by Clinton by meeting “with Arseny Yatsenuk, leader of the United Opposition, during the week of September 3, 2012 regarding democratization and free and fair elections in the Ukraine.”

Pinchuk has promoted his wealth through Forbes, which claims he is worth about $3.8 billion, based on estimates about Interpipe. According to Forbes, “the majority of his wealth comes from traditional pipe manufacturing; this past year, his Interpipe launched a $700 million steel plant, the first such plant build from scratch in Ukraine since 1991. Other parts of his diversified empire have not fared as well.” Pinchuk refers to himself in the court documents, together with Bogolyubov and Kolomoisky, as “billionaire Ukrainian businessmen”.

Pinchuk’s claims unexpectedly invite an accounting of his financial position, net of debt. Interpipe says its financial report for 2012 has been delayed, and there are no IFRS interim reports since the July 4, 2012, publication of the 2011 results. An analysis of the 2011 financial report indicates that Interpipe depends on Ukraine for 36% of its revenues, 25% on Russia; it was much the same in 2010. The asset concentration is even more dependent – 92% in Ukraine. The gross debt identified in the report is $1.026 billion.

At page 41 of the 2011 financial report, it appears that Interpipe’s banks have tried to secure themselves against the disappearance of trade proceeds by requiring Pinchuk to implement two cash pledges of $270 million and $160 million “arising out of certain intra-group sales contracts” and between trading subsidiaries and “their ultimate customers”. Combined, those pledges represent 26% of the sales revenue reported for 2011. As a condition of Interpipe’s bank debt restructuring terms, an override agreement with the banks also required Pinchuk to pay $65 million in fresh capital into Interpipe, plus a $40 million letter of credit – see Note 17. The terms also barred payment of dividends to Pinchuk (page 41). What therefore can be Pinchuk’s income if he has been denied dividends from Interpipe since 2010?

The evidence to answer that question is scanty, but it raises the possibility, made explicit by the Financial Times, that like Boris Berezovsky’s attempt to sue in the High Court for cash from Roman Abramovich, Pinchuk is trying a similar stratagem.

The 2011 financial report indicates Interpipe’s earnings (Ebita) for 2010 to be $169.5 million; $255.5 million for 2011. By calculating Pinchuk’s “net worth” as of March 2013 at $3.8 billion, Forbes is in effect calculating the market value of Interpipe at $3.8 billion. Assuming the 2012 Ebita to be not less than the 2011 figure, this suggests an Ebita-market cap multiple for Interpipe of 15x. This looks to be an exaggeration.

TMK, Russia’s leading pipemaker, is an obvious peer for comparison, even though it is four times larger than Interpipe by sales revenue. For TMK the ratio of Ebita to market cap is around 3.5x. The Forbes calculation of the “net worth” of Dmitry Pumpyansky, the control shareholder of TMK, is reported to be $2.2 billion. This Forbes calculation is a direct extrapolation from Pumpyanksy’s 70% shareholding in TMK. Comparing the Forbes calculations for Pumyansky and Pinchuk, the Pinchuk number appears to be unlikely.

It is evident from Interpipe’s financials that Pinchuk is running an enormous financial risk on the revenue and profitability of the new EAF plant, and the capacity of the markets to absorb its products. This in turns depends on the currently depressed prospects for pipes and other steel products in the Ukraine, in Turkey, Russia and other export markets; on the reaction of rival Ukrainian consumers of the extra steel scrap Pinchuk’s new mill requires; and on Pinchuk’s efforts to hold down the price and profitability of the scrap business.

According to Ukrainian sources, Interpipe currently depends on high-cost electricity supplied to Pinchuk by Akhmetov, whose testimony will be sought by both sides if the case goes to trial.

The record presented so far by Pinchuk fails to identify a link to the UK for the assets in dispute, or the meetings allegedly held to settle on terms. The language the principals and their witnesses used appears to have been Russian.

chebotarevaThe little paperwork to which Pinchuk’s court claim refers was not in English, and according to the Particulars of Claim, it was drafted after the September 2006 meeting by Yulia Chebotaryova, an employee of Pinchuk’s since 1993 and currently chief operating officer of his investment unit, EastOne.

Despite the acknowledgement in the court papers that Bogolyubov was absent from the key Geneva meeting in 2006, jurisdiction is held by the London court over the three Ukrainians and the Ukrainian mine, according to Pinchuk’s lawyer, because “Mr Bogolyubov is based in London” and also because “the claim against [Kolomoisky] is so closely connected with the claim against Mr Bogolyubov that it is appropriate they should be heard together.”

The claim documents submitted by Pinchuk’s lawyers go one step further, arguing that when the meeting was held in Geneva Kolomoisky and the absent Bogolyubov agreed to be governed by UK law. Back in 2006 that was Pinchuk’s idea. “Following a suggestion by the Claimant [Pinchuk], the parties orally agreed that any disputes regarding the Constitution [deal terms] would be dealt with by the English Courts applying English law.” Whether Pinchuk can prove that or not, his lawyers have a fall-back position. This is that Bogolyubov is domiciled in London, though a source close to the Pinchuk side conceded that this may not have been the case when the September 2006 meeting took place.

A recent court case initiated by Elena Pinchuk, Pinchuk’s wife, may be a portent of what’s to come in London. In that case, which went through US arbitration and the courts for six years, a Cyprus company controlled by Mrs Pinchuk refused to pay a Washington landscape architect $170,000 (rounded) for work on the grounds of the family home at a former state sanatorium near Kiev. The architect counter-claimed, and by the time the affair was settled this past January, the bill for the Pinchuks came to more than $500,000.

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